Mon, 12 Sep 2011
With a low price/book value, the reward for AIG stockholders could be attractive, but the franchise has been weakened, says Davis/Selected American manager Ken Feinberg.
Dan Culloton: One stock that perhaps I am sure you hear a lot about and that comes back maybe to haunt you sometimes is AIG. It's coming public again. Under what circumstances would you own it or would you own it at all again?
Ken Feinberg: It's a very good question. I always like to say, I've never heard of AIG, but that doesn't seem to pass muster. I was actually not in the meeting, but our firm did meet with the CEO when Goldman Sachs was taking the company around a few weeks ago, and it's an interesting risk-reward. We didn’t buy any on the IPO or the secondary from the government, but the stated book value is about $46 a share, and there might be some additional value in the tax benefits that they haven't booked yet because no one knows how profitable the company will be, but some people think they could be worth another $5 or $6, and yet the stock came at about $29, and it's trading today at $27 and change. So, it's rare that you find companies trading at 60% of book value.
The issue, or some issues, there is that while the property-casualty industry is a very competitive industry, as you know. It’s a very unattractive industry for most players, just because the agent or the broker tends to control the business, and it can get shopped around. So, the actual underwriter doesn’t really have much franchise value there. They have skills in underwriting, but that’s about all they can bring.
So, one of the issues is that while ... it's been difficult, the industry is actually reporting a lot of profits, and this year will be different because of the catastrophes. So, it's been an unusually profitable industry of late, except for AIG.
So, AIG was really the only company that had to strengthen their reserves by about $6 billion, at a time when almost every other company has been releasing reserves because claims have been settled for less than they had anticipated. So, if one wanted to be a little bit skeptical, one would say, why would this one company be all the way out here by themselves having to strengthen their reserves and everybody else is showing good earnings and releasing them.
So one might say, well, that means I can't trust the financials, because they have already shown me I shouldn’t trust them. That doesn’t mean going forward they won't be better, because they have been under a lot of scrutiny from the GAO and other people. So, I think it's interesting, because it's very difficult, and I actually worked in the property-casualty industry for seven years and used to meet our actuaries. It's very difficult from the outside to judge how much in reserves a company should have. It's actually even difficult inside because the risks keep changing, terms and conditions keep changing. So it's sort of a ballpark, so if they had $60 billion of reserves at AIG, internally, one might say they should have somewhere between $55 billion and $65 billion, but no one really knows the right answer.
So, if one accepts the fact that you can't know what the reserves should be, and that AIG has addressed their past problems in their reserving, one could definitely say the reward could be pretty good, if you are starting out at such a low 60% of book value, but the franchise has been tremendously weakened, in my opinion. A lot of good people have left. The company says they haven’t lost good people, but clearly they have lost a lot of good people, and the power of the name is certainly less attractive today in getting good business to come their way than it was five years ago. So, I think it's good actually for America if they do do well, clearly, because the government still owns 80% or so. I think it's just good for the taxpayer for sure, and it would be again another sign of a successful bailout, and it's not to say we might never own it. It's just a company where you just won't know for sure what the balance sheet really looks like.